Monday, June 4, 2012

Pie Distribution

Buy-in is important.  Unless distracted or ignorant, people tend to get upset when they feel cheated.  Note that I use the word "feel" rather than "are".  This is because it doesn't matter whether people actually have been cheated or how we'd even determine the objective reality of it.  Action is based on perception, not reality.  Onward to pie.

Imagine two pies and two ways of slicing them.  To simplify things, let's assume that these pies are of equal quality and the only differences are the size (as measured by the number of blueberries used to make them) and slicing method (as measured by the size of the slice you get).  The first pie has 10 pounds of blueberries in it.  It is cut into ten slices and you get one.  In effect, you have 10% or 1 pound of blueberries.  The second pie has 15 pounds of blueberries it it.  It is cut into twenty slices and you get one.  In effect, you have 5% or .75 pounds of blueberries.

In Capitalism 101 we're told that the best result comes from everyone looking out for themselves (in 102 they cover externalities and information asymmetry, but no one takes that class).  What is the best result?  Well strangely enough, we're often told it in terms of "the economy" or "unemployment", broad, abstract concepts which can be thought of as generalized social benefit.  That's nice and all, but teacher told us to look out for ourselves.  So why are we concerned about that social benefit stuff?

If we follow the rules we're taught, to look out for ourselves, we'll take the first pie, because it gives us the bigger slices.  Why would we care about the overall pie if we're supposed to look out for ourselves?

These were, of course, stupid pies.  A more realistic pie would instead be one which accounts for how distribution affects size.  Excessively skewed distributions can cause problems.  If someone is promised too small a slice, then merely cutting it will reduce it to crumbs.  In this analogy the cutting is taxes and cost of living, since by my measure, merely continuing to live is not as good as getting pie.  We could cut taxes, and of course that would help, but the efficient method is to even out the slices, to ensure that no slice is so small as to not be worth cutting.

Promise me a bigger piece and I'll pick more blueberries.  This is good.  Though there is the potential for the promised piece size to rise faster than the blueberry picking, so that, for example, if 20% of people are promised half the pie, the remaining 80% might see themselves as getting cheated.  The perception has come back to us.

Whether you believe the system of the market is fair, the outcomes can quite easily feel unfair.  We could argue that they are not, but that's not going to fix perception.  It's not going to fix action.  By action I mean people getting aggressive: taking and revolting.  We could hire a few to imprison the rest, but as a rule, security is an enabler of wealth, not a creator, so now a certain part of the pie is being used to ensure that others don't ask for more pie.  That's hardly efficient.

Ultimately, the American-style market tends to be self-destructive.  The theoretical perfect market may emerge, but as success is rewarded, it unbalances the field and ceases to as perfectly reward success, with an increasing negative slide.  A few exceptions do not disprove a trend.  Moving away from the economics to the sociology, the mentality needed for a market, of looking out for oneself, is precisely the mentality which would lead a majority of people away from the market because regardless of what it does for the overall pie, it is not the way to maximize their own pie.

In other words, the majority of the world is not extraordinary so a system which places the majority of the rewards with the extraordinary will be unacceptable to the majority.  Thankfully for the wealthy, there are religion, race, and region to distract people from the cause of their misery.

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